Page 121 - JoFA_2022

TAX MATTERS

Don’t try this at home Eagle coins constituted taxable distri-

Gold coins kept in taxpayer’s butions equal to their purchase price,
residence caused taxable IRA finding that McNulty possessed the
distributions. coins despite their purported ownership
by Green Hill. McNulty argued that the
A taxpayer’s physical possession of gold coins were assets of Green Hill and that
coins purchased with her individual she did not use them, so her physical
retirement account (IRA) caused her to receipt of them did not constitute tax-
have taxable distributions from the IRA, able IRA distributions.
the Tax Court held. IRA and coins she and her husband The Service further contended that
Facts: In 2015, Donna McNulty purchased directly. McNulty violated the statute’s prohibi-
purchased IRA services through the McNulty’s joint returns with her tion against commingling IRA assets,
website of Check Book IRA by which husband for the two years were prepared which caused taxable distributions of
she established a self-directed IRA that by a CPA, but they did not consult the the coins when they were stored in the
was the sole member of Green Hill CPA about the tax reporting of their home safe, even if the Tax Court were to
Holdings LLC. Check Book advertised IRAs or physical possession of the coins. conclude McNulty’s physical possession
on its website that such an LLC could In 2018, the IRS issued the McNultys a of the coins did not. McNulty countered
invest in American Eagle gold coins that notice of deficiency, determining in part that because she labeled the coins as
the IRA’s owner could then hold at his that McNulty had distributions equal purchased with IRA funds before putting
or her home without tax consequences to her American Eagle coins’ cost of them in the home safe, she did not com-
or penalties so long as the coins were $374,000 in 2015 and $37,380 in 2016, mingle them with other coins in the safe.
titled to the LLC. American Eagle gold, resulting in deficiencies of $250,558 and Alternatively, McNulty argued that
silver, platinum, and palladium coins are $18,094, respectively. The IRS further because Sec. 408(m)(3)(B) specifies
produced by the U.S. Mint and sold by proposed accuracy-related penalties under that bullion must remain in the physi-
authorized dealers. Sec. 6662 based on these deficiencies. cal possession of an IRA’s trustee, that
McNulty named Kingdom Trust Co., Law and regulations: Under Sec. requirement does not apply to coins
an independent qualified custodian, as 408(h), a custodial account is treated described in Sec. 408(m)(3)(A), includ-
the IRA’s custodian. Green Hill’s articles as a trust that can qualify as an IRA ing the American Eagle coins. This, too,
of incorporation named McNulty and under Sec. 408(a) if its assets are held the IRS disputed.
her husband as its managers and their by a bank (as defined by Sec. 408(n)) or As for the penalties, the McNultys
personal residence as its principal place another person who demonstrates to the argued that their research of the
of business. The couple also both had IRS’s satisfaction that the person will IRA/LLC structure and their use of
signatory authority over Green Hill’s administer the account consistently with Check Book’s advice and service in
bank account. Sec. 408’s requirements, in which case the setting it up, along with unclear IRS
McNulty authorized direct trans- custodian can be treated as the account’s guidance respecting physical possession
fers to her IRA of $378,487 from an trustee, as further delineated in Regs. of coins, demonstrated they attempted
individual retirement annuity in 2015 Sec. 1.408-2(e). IRA assets cannot be to comply with the law, constituting a
and of $48,375 from a Sec. 401(k) plan commingled with other property except reasonable-cause defense.
in 2016 and directed Kingdom Trust to in a common trust fund or common Holding: McNulty’s physical custody
use those funds to purchase member- investment fund (Sec. 408(a)(5)). of the American Eagle coins gave her
ship interests in Green Hill. She then Sec. 408(m) forbids IRAs from invest- unfettered control over them, resulting
had Green Hill use most of the funds ing in certain items designated as collect- in taxable IRA distributions, the Tax
to purchase American Eagle coins from ibles, including at Sec. 408(m)(2)(D) “any Court held. Despite the LLC’s formal
an authorized dealer. The coins’ invoices stamp or coin,” with an exception under interposition and although she did not
listed Green Hill as the purchaser, but Sec. 408(m)(3) for certain gold, silver, or use the coins, she was free to do so
the shipping labels identified McNulty platinum coins or bullion “if such bullion however she might have chosen. The
and/or her IRA as the recipient. The coins is in the physical possession of a trustee” court found that McNulty’s arguments IMAGES BY YURIY ALTUKHOV/ISTOCK
were shipped to McNulty’s home, where of the IRA (Sec. 408(m)(3)(B)). to the contrary would create a situation
she stored them in a safe along with coins Issues: The IRS contended that “ripe for abuse” that would subvert Sec.
purchased by her husband’s self-directed McNulty’s receipt of the American 408’s fiduciary requirements. “Personal

28 | Journal of Accountancy March 2022